WEBR | New Short Idea. Should Never Have Come Public.
We’re going short Weber (WEBR) as we think that you’re currently looking at peak demand, and subsequently peak margins and earnings – which are grossly unsustainable. This stock is egregiously expensive on recovery earnings, which should be about 70-80% lower vs what we see today. This call is quite simple…the company has been private for its entire life, and the PE firm that owned it since 2010 saw a unique window for an exit strategy by capitalizing on both the increase in housing turnover and the surge in demand for eating/cooking from home (particularly outdoors) that drove the category up by 40%+ over the course of COVID. That allowed the company to a) sell meaningfully more units through its wholesale and direct channels, and b) do so with little discounting driving Gross Margin from 45% to ~50%, and c) leveraging its SG&A infrastructure by taking down SG&A margins by another 300-400bps. All in, margins went from 11-12% pre-pandemic to something closer to 18-20% today. That results in about $0.75-$1.00 per share in EPS power this year. But let’s face reality…this company has 24% market share in what is usually a steady 3-5% growth category. Next year we’re likely to see the category shrink by a good 10%, and we don’t think WEBR will make up for that delta with increased market share. Ultimately, as the model quickly de-levers on more normalized top line trends, we think we’re back to 12% margins over a TAIL duration, which gets us to about $0.20 per share in sustainable earnings power (it has a staggering 287mm shares outstanding, plus a billion in debt). Yes, Weber is a great brand with dominant share and category leadership, but it’s not worth more than 20x-30x earnings – which suggests a $4-$6 stock vs its current $16. We’d actually argue a consumer durable-esque 12-15x multiple as being more realistic. There are near-term positive catalysts to watch out for, like the release of the June and Sept quarters (likely at the same time) which should be the end of the topping process for the P&L. There’s also ‘initiation day’ where the bankers are likely to come out and pump the stock in early September (it just IPOd Aug 5th). But don’t be fooled…the earnings power this company is putting up today is a mirage. Completely and utterly unsustainable. We see upside to $20 on the positive catalysts, and downside to the low single digits when economic reality sets in. Once we de-risk the coming earnings reports, this name has Best Idea Short written all over it.
BKE – Elevating The Buckle to top of our Long Bias List. The quarter last week was everything we wanted to see as it relates to how the company is executing on the top and bottom line. Sales were already reported on Aug 5th, so no major surprises there…though still notable that top line was +44.8% vs 2019, which is impressive in itself. Similarly, Gross Margin was up 480bps vs last year, but up an even more impressive 950bps from 2019. We’re seeing most Softline companies beat on the gross margin line this quarter, which we expected, but the big difference will be who can sustain it into next year, and we think that BKE is one of them. Cash position here is excellent, with $405mm in net cash on the balance sheet, and only $2.1bn in cap. This stock is trading at close to 6x earnings ex-cash, and if we’re right on use of cash, you’re currently looking at a 14-15% yield on the RECURRING special dividend that will escalate materially in the back half of this year. We like this idea a lot in the low-$40s, as we think it’s one of the few Softline retailers that will still grow earnings next year off this years’ peak, and will pay cold hard cash to investors while they wait.
Removing MUDS from the long list. With the Topps SPAC merger cancelled, there’s no reason to keep this ticker on.
CTRN earnings Tuesday this week. The stock has fallen since small cap consumer has underperformed in the last few months. Last Q the market didn’t seem to like the management team talking about shifting capital allocation to capex for growth as opposed to stock repo, at the same time management was conservative in its 2H outlook (we are still mid pandemic). However since that point in time we have gotten much more bullish on the apparel space and outlook on category margins is nothing but bullish. Every apparel data point we have seen for 2Q so far looks bullish for this consumer base… TGT, CRI, PLCE, WMT. It’s hard to think CTRN isn’t seeing similar strength. Given the regularly low discretionary income levels, the recent child tax credit payments has to be a material spending tailwind for the CTRN consumer. Comments in retail 2Q on back to school have been very positive and CTRN guidance or comments are likely to be bullish. So the outlook on 2Q EPS and 3Q guidance is positive, the only question is with small cap underperforming, how much will market care? The implied multiples on current year earnings have been falling for retailers with many materially beating. We remain long CTRN. Short interest has risen on this name a lot, from 6 to 17% over last 4 months. Company was buying stock in the 80s last Q, if it has the cash it will buy more at these kind of prices. Perhaps a beat creates some squeeze potential. We think this story is more than just a stimulus winner and longer term it’s one of the few retail unit growth stories and at these stock prices could be a takeout candidate.
